Dairy sector: A global view

Global milk production is now estimated to expand by a slower pace, far slower than in the recent past. Growth prospects have been affected by a number of factors as international markets have been responding to the historically high international price levels of the past couple of years. On balance, prospects for the world's six major milk product exporters, which cater 77 per cent of global trade, have improved somewhat in recent months. Their milk production is now expected to hover around 40 per cent of global production. But production growth is slowing in some regions, due to high feed prices and high opportunity costs for pasture. In some areas, new issues have surfaced that may affect consumer demand.

In particular, food safety concerns are currently clouding the dairy outlook. Dairy products [which include milk, butter, cheese and eggs] make up 0.8 per cent of world trade.

In terms of US dollars worth of dairy products exported (net), New Zealand has the highest per person earnings at US$ 641 a year. Dairy produce from New Zealand is exported to 140 different territories. Overall, less than a quarter of the world territories have net dairy exports. If the current trends are of any indication: commodity-wise and country-wise picture reflects not a very rosy picture. Skim milk powder exports are now expected to rise, particularly due to recent increased exports from the United States, which was larger than expected.

EXPANDING MARKETS: Global exports of whole milk powder are expected to rise, as global milk supplies expand. Whole milk powder remains the key milk product exported by surplus milk producing regions to growing developing country markets. New Zealand, the largest whole milk powder exporter, is set to increase sales. But the largest increases are expected to be from the European Union, as its milk production increases. Deliveries by Australia and Argentina are expected to be better. Algeria and Venezuela are the two largest importers of whole milk powder, and while imports in the former have declined considerably, those of the latter have remained firm, despite high prices. Milk production in these two countries has been increasing, under efforts to replace imports.

International cheese trade continues to grow and is by far the highest value market for milk products; exports are expected to go up steadily. Exports from the European Union are expected to fall. The United States increased its exports of cheese and reduced its imports during the recent price spike and it is uncertain whether this situation will be sustainable as its dairy sector slows under falling domestic prices and high feed costs. On the import side, most of the growth in trade occurred within the Russian Federation and the growth of this market will depend on how the country fares in the current economic conditions.

CHANGES: SPEED TO BE JACKED UP: It is becoming clearer that regional trade shares are changing, and this may mark the new emerging structure of the world dairy market. Europe's role as a major source of supplies for trade has diminished significantly, as has that of Oceania, while those of the US and Asia have grown. The United States may export, increasing its trade share to around 12 per cent. Conversely, the trade share of the European Union is set to fall. Milk production is now expected to rise by only marginally in Asia. This reduced rate of growth is largely caused by a sharp slowdown in China [now the world's fourth largest dairy producer]. The reduced speed reflects increasing production limits, related to water and feed supplies, as well as the fact that the size of the production base has increased substantially.

The reduction of production growth in China may be critical in the longer term for world dairy markets. If domestic demand continues its pace, imports could grow significantly. However, the discovery in mid 2008 that melamine had been blended into a significant portion of the Chinese milk supply to enhance the protein content of watered down milk has cast severe doubts over China's dairy sector, including its growing product export potential, but also suppressed consumer confidence worldwide, especially in developing countries. Elsewhere in Asia, strong output growth is forecast in the large traditional milk producers: India is expected to sustain its normal growth, while Pakistan looks set to increase production as high internal prices have stimulated investments in the sector. However, all of Pakistan's increased production will be absorbed domestically.

South America is all set to be the fastest growing milk production region. Argentina's milk production growth has been limited by lower returns due to large export taxes on milk products, whereby taxes are adjusted to maintain lower domestic prices. This policy induced some milk producers to participate in national strikes and blockades in early 2008. Brazil may soon be the second largest exporter in the region or even the largest if current trends continue over the next several years. In other parts of Latin America and the Caribbean, Mexico, one of the world's largest importers of milk powders, will post limited milk production gains given high feed costs and a shortage of domestic available feed.

As a whole milk production in Africa is anticipated to be consistently below world average growth, showing weaker supply response to the price spike. But the United States' dairy sector responded significantly to attractive internal and external prices in the last couple of years. However, this growth is lower than expected, due to the downturn in profitability experienced so far this year, as indicated by the milk to feed price ratio.

This has limited milk yield growth and has induced higher culling of cows. In addition, the recent appreciation of the United States dollar has lowered the competitiveness of the United States' industry on international markets compared with the situation of even a couple of years back. In Canada, higher feed costs have induced yet higher target prices, and this has limited domestic market growth; production is expected to remain stable. In India today, the animal husbandry and dairy sector has occupied a very significant position in generating gainful employment in the rural sector, particularly among the landless labourers, small and marginal farmers and women by supplementing their family incomes. Livestock continues to be the best insurance against the vagaries of nature like drought, famine and other natural calamities.

Dr B K Mukhopadhyay is Professor (Management) ICFAI University, Tripura, India.

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